The growth of the global Islamic finance industry in 2015 was low at only 0.7%, compared with the previous year which was 15.6%. In fact, the global Islamic capital market was undergoing a negative growth, -2.3% whereas in the previous year it was 17.9%. Global Sukuk growth decreased by -43%, as well as mutual funds by -6% and all global Islamic indices showed negative performances. How do we accelerate growth in the Islamic capital markets to bring it back to where it was in 2014 in the future? According to IRWAN ABDALLOH, the key is to develop a number of Islamic brokerages and Islamic securities as well as infrastructure.
Review of 2016
In 2016, the global Islamic capital markets showed positive but insignificant growth. Although the performance of the global Islamic stock indices improved, the growth of the Islamic securities market was still slow. Malaysia, which has the biggest market share in global Sukuk, is still facing negative growth while Indonesia on the other hand continued to increase its market share and Saudi Arabia is still dominating the global funds market. Nothing has been significant in the development of infrastructure nor in products of the Islamic capital market. During 2016, the global Islamic capital market focused on internal consolidation.
Islamic brokerages are limited
Currently, the trading of Islamic securities is dominated by non-Islamic brokerages. These brokerages will immediately switch to trading in non-Islamic securities in the event there is a decline in the returns of Islamic securities which will ultimately create an unstable Islamic securities market. This happens because of the limited number of Islamic brokerages. For example, Malaysia has only one fully-fledged Islamic brokerage and nine Islamic window brokerages though it has the largest market share in Islamic securities in the world. Indonesia, having the biggest potential in the Islamic capital market, only has 12 Islamic windows and no fully-fledged Islamic brokerage. Likewise, Islamic brokerages are very limited in other countries as there are no global standards specifically for managing Islamic brokerages.
Islamic capital markets need more products
Investors have limited products for investing in Islamic securities which are limited to Islamic stocks, Sukuk and Islamic funds. Although some countries have developed Islamic exchange-traded funds (ETFs), Islamic securitization or Islamic derivatives but the amount or value is still insignificant. Malaysia has only four Islamic ETFs, four Islamic REITS and one Islamic futures while Indonesia only has one Islamic ETF. To accelerate growth, the Islamic capital markets should increase the number of Islamic securities.
Preview of 2017
The Islamic capital market will still show high potential growth in 2017. Global Sukuk will tend to increase in terms of value and numbers. Some countries will issue new Sukuk like Indonesia whose government has a commitment to finance infrastructure development through the capital market. The global Sukuk market share of Malaysia is expected to decrease approximately below 50% and Indonesia’s market share will increase above 20%. The global funds market will still be led by Saudi Arabia and Asia will still dominate the global Islamic capital market.
Conclusion
The Islamic capital market should aim for some breakthroughs in terms of the number of Islamic brokerages, infrastructure development and the number of Islamic securities. To increase volume and Islamic capital market capitalization and also reduce market fluctuation, Islamic brokeragesshould be multiplied in terms of numbers. Brokerages should create a tool or system to help investors trade easily in the Islamic way. Furthermore, the Islamic capital market needs new issuance of Islamic securities and to create new Islamic-based products.
What has been done by Indonesia to accelerate the growth of the Islamic capital market is quite interesting. The country created an online trading platform which complies with Islamic principles to help investors trade stocks in the Islamic way. As a result, the number of Islamic-based investors in Indonesia has increased significantly – more than 1,000% in the last five years.
Irwan Abdalloh is the head of Islamic capital market development at the Indonesia Stock Exchange. He can be contacted at [email protected].